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IBM Has Optimistic View of 2009

With so many recent dire warnings and disclosures about fourth quarter earnings, IBM's quarterly and year-end announcements on Tuesday were positively a breath of fresh air, even though it did note some dips in fourth quarter business.

For the fourth quarter ended December 31, 2008, IBM (NYSE: IBM) reported revenue of $27.0 billion, a six percent decrease (one percent when adjusting for currency) from the fourth quarter of 2007. Net income, however, was $4.4 billion, or $3.28 per share, up 12 percent over the fourth quarter of 2007.

For the year, the company posted record revenue of $103.6 billion, a five percent increase (or two percent when adjusted for currency). It posted a record pre-tax profit of $16.7 billion and net income of $12.3 billion, or $8.93 earnings per share, an 18.4 percent increase over 2007.

For the quarter, IBM did take some hits, but they were nothing like the 20 percent drop at Intel or the 50 percent drop at nVidia. Global Technology Services revenue was down four percent while Global Business Services revenues were down five percent. The company signed $17.2 billion in service business, with 24 deals greater than $100 million.

Systems and Technology, the hardware segment, took the biggest fall, down 20 percent (16 percent, adjusting for currency) to $5.4 billion. Only System p, its POWER-based RISC servers, was up, rising eight percent. System z mainframes were down six percent over the prior year, System x x86 servers fell 32 percent and System i, which was discontinued and merged with System p, fell 92 percent.

As it turns out, the System x sales fell not due to the economy but thanks to virtualization. Mark Loughridge, senior vice president and chief financial officer of IBM, told a conference call of financial analysts it was virtualization that hit x86 sales, particularly the blade servers, which had previously enjoyed booming sales. Blades were down 27 percent quarter-over-quarter.

"Customers are virtualizing and consolidating workloads into more efficient platforms like POWER and the mainframe," Loughridge told the conference call. "We are shifting to higher value services and software and becoming less dependent on commodity and cyclical business. In hardware, that shift is to the high end to help customers consolidate their servers."

What does the "M" stand for, exactly?

For the year, Global Technology Services revenues were up nine percent, Global Business Services revenues were up nine percent, and software revenues rose 11 percent. For a company founded as "International Business Machines," there's almost no machines left at IBM. Loughridge said that 90 percent of IBM's profit comes from services, software and financing. Services alone provide 42 percent of IBM profit and 60 percent of its business.

Global Technology Services totaled $39.3 billion for the year, nine percent growth over 2007 and an increase of 9 percent and 38 percent of total business. The Global Business Services segment accounted for $19.6 billion in revenue, up nine percent and accounting for 19 percent of total revenue.

The software business in 2008 totaled $22.1 billion, an increase of 11 percent and 21.3 percent of the total business. Systems and Technology revenues were $19.3 billion, down 10 percent and accounting for 18.6 percent of total revenue. Only the Global Financing segment was smaller, with $2.6 billion in revenue.

Loughridge said IBM has shed $15 billion in revenue by divesting its hard disk, PC and printer businesses in recent years, and spent another $20 billion in acquisitions, including the $5 billion purchase of business intelligence software company Cognos. But the payoff is coming in its ability to weather the economic storm.

"We have had relatively stable revenue performance by delivering what customers need in this environment. For a customer trying to save costs and cut capital expenses, we can help with that," he said. Three-quarters of the signings in the Global Technology Services unit delivered cost savings for those customers.

IBM projects that in fiscal 2009 it will see total net income of $9.20, but not right away.

"We think the first half of 2009 from an economic standpoint will be more difficult than the second half," said Loughridge. "With the stimulus packages being put in place, the economies will start to improve as we go to the back half of the year. Likewise, for the first quarter our performance will be relatively flat, with growth especially in second half of the year."